Fees and rates in payment processing are complex. There are hundreds of possible different types of fees. A “monthly minimum fee” comes up frequently for merchants accepting credit cards. This article covers what monthly minimum fees are, how they work, what they mean for a business, and how to manage them.
Definition of Monthly Minimum Fees
A monthly minimum fee is a charge that payment processors impose on merchants who accept credit cards if their total transaction fees in a given month do not reach a specified threshold. This fee is part of the payments contract between the merchant and the payment processor. The monthly minimum is typically between $20 and $50. We estimate that around 30% of merchant account contracts have monthly minimums.
Essentially, the monthly minimum fee is a guarantee for the payment processor that they will receive a certain amount of revenue from a merchant each month, regardless of the transaction volume. If the fees from the actual transactions processed fall below this guaranteed amount, the merchant must pay the difference up to the minimum required.
How Monthly Minimum Fees Work
To better understand this concept, here is an example. Suppose a payment processor has set a monthly minimum fee of $25.
If in a particular month, your business processes enough transactions that generate $30 in processing fees, you’ve met and exceeded the monthly minimum, no additional fee is assessed. However, if in another month, you only generate $10 in processing fees, you will owe an additional $15 to meet the $25 monthly minimum.
As a merchant, if your total effective payment processing rate is 2.1%, you would need to process over $1,190 per month to generate $25 and hit the monthly minimum amount.
This fee structure is particularly significant for small businesses or seasonal businesses that might not consistently hit the required transaction volume every month.
Monthly Minimum Fee Impact on Businesses
The impact of monthly minimum fees can vary depending on the size and sales volume of a business:
- Small Businesses: For small businesses that have lower transaction volumes, monthly minimum fees can represent an additional cost burden. During slow months, these fees can take a bite out of profits.
- Seasonal Businesses: For businesses that see significant fluctuations in sales, such as those that rely heavily on holiday sales, monthly minimum fees can lead to months where the additional fees are a concern during the off-peak season.
- Large Businesses: For larger businesses with consistent, high transaction volumes, monthly minimum fees are less of a concern as they regularly exceed the threshold set by payment processors.
This is one reason why aggregators, like Stripe and Square, are better for smaller merchants. Aggregators typically do not have monthly minimums. It is typically payment processors that offer dedicated merchant accounts that have monthly minimum fees.
Strategies to Manage Monthly Minimum Fees
Here are some strategies businesses can employ to manage or mitigate the impact of these fees:
- Negotiate Terms: When entering into an agreement with a payment processor, negotiate the terms of the monthly minimum fee. Many processors will offer lower minimums or waive them altogether for certain periods.
- Understand Your Sales Cycle: Knowing your business’s sales patterns can help you anticipate months when you might be liable for monthly minimum fees and plan accordingly.
- Shop Around: Compare different payment processors. Some might offer more favorable terms, lower fees, or even no monthly minimum fees, which can be advantageous for smaller or seasonal businesses.
- Smaller Merchants Can Use an Aggregator: For smaller businesses, using an aggregator like PayPal or Square can be a practical alternative to traditional merchant accounts with payment processors that charge monthly minimum fees.
